Reassessing the Causal Impact of Fiscal Decentralization on Poverty Severity in Indonesia

. Ahmad and Muhamad Armawaddin
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. Ahmad: Halo Oleo University, Indonesia
Muhamad Armawaddin: Halo Oleo University, Indonesia

Journal of Economic Development, 2026, vol. 51, issue 2, 1-11

Abstract: This study reassesses the causal impact of fiscal decentralization on poverty severity in Indonesia using province-level panel data for the post-decentralization period. While existing studies largely focus on poverty incidence and rely on conventional estimators, this paper emphasizes poverty severity and explicitly addresses fiscal endogeneity. An instrumental-variable approach is employed to identify the causal effects of own-source revenue, intergovernmental transfers, and expenditure composition. The results show that fiscal decentralization has a limited and highly conditional impact on poverty severity. Once endogeneity is controlled for, only own-source revenue exhibits a statistically significant poverty-reducing effect, whereas transfers and sectoral expenditure shares have no robust causal impact. These findings suggest that strengthening local revenue capacity and fiscal accountability matters more than relying predominantly on transfer-based decentralization.

Keywords: Fiscal Decentralization; Poverty Severity; Instrumental Variables; Local Government Finance; Indonesia (search for similar items in EconPapers)
JEL-codes: H71 I32 O23 R58 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ris:jecdev:023034

DOI: 10.35866/caujed.2026.51.2.001

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